What is the 10% test, and how does it work? It is a budgeting exercise designed to help you identify opportunities to reduce spending and increase your retirement savings.
Review each major spending category, including groceries, dining out, clothing, entertainment, subscriptions, and vacations. Then ask where you could realistically reduce expenses by approximately 10% without sacrificing essential needs or important financial protections.
For example, if you spend $800 monthly on groceries and dining out, the test challenges you to find $80 in savings. Repeat the exercise across your adjustable spending categories, then automatically redirect the total savings into a retirement account or another appropriate investment.
Once you achieve the first 10% reduction, you may discover additional ways to save. However, avoid cutting essential healthcare, insurance, debt payments, or emergency savings simply to meet an arbitrary target.
Consistently saving and investing more may accelerate your retirement timeline because your investments have more time to compound while your ongoing lifestyle costs become lower. However, the 10% test does not guarantee that you can retire 15 years early. The actual impact depends on your income, current savings, investment returns, retirement expenses, taxes, inflation, and the number of years available to invest.
Use the Consumer Financial Protection Bureau’s spending tracker to review your expenses and the Investor.gov compound-interest calculator to estimate how investing the savings could affect your long-term retirement balance.
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